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Why your start-up needs a Shareholders’ Agreement

Starting a new business can be stressful and exciting in equal measure.  Whilst enthusiasm and optimism are valuable in the early stages, it’s important to also be realistic and plan to protect the future of your business from the outset, especially if you’re setting up a new start-up limited company venture with one or more business partners.

A good way to do this is through the use of a Shareholders’ Agreement…

A Shareholders’ Agreement is a legal document opted into voluntarily by all shareholders of a limited company, with the purpose of regulating relationships, rights and obligations of the various shareholders as well as certain day to day operational aspects of the business.

A start-up can use a Shareholders’ Agreement to foretell certain scenarios that could negatively affect the progress or growth of the company. Although a Shareholders’ Agreement won’t prevent a problem by itself, it will however outline a default position on how problems can be fixed and what actions will have to be taken to solve any such problems.

An agreement of this nature is particularly important for a new business given the unpredictable path most start-ups take in their early years, important changes/decisions are likely to be made due to a variety of reasons so it’s imperative all parties are on the same page.

From our experience, it is a lot easier to get this type of agreement signed off at the outset of the business relationship whilst the start-up business has a relatively low value and all the shareholders are keen to work together based on the initial excitement and enthusiasm of the new venture. Once the business has some value, time has passed and some issues may have arisen between the shareholders, putting such an agreement in place can actually be quite difficult.

A Shareholders’ Agreement can help decide key things for your start-up such as:

  • Who the shareholders are and in what proportion they hold shares/equity
  • The roles and responsibilities of key shareholders
  • Distribution of profits
  • Restrictions on transferring shares so shares doesn’t become diluted or passed on to third parties the other shareholders don’t approve of
  • Procedure for when a shareholder wants to leave the business, or if a shareholder passes away, falls critically ill or resigns
  • How a departing shareholder’s shares are valued
  • Restrictions from shareholders being involved, both whilst a shareholder and for a period of time afterwards, in a competing business and from poaching customers and employees after their departure

Shareholders’ Agreements are also particularly effective when it comes to solving disagreements amongst shareholders. By working out ahead of time how certain important decisions should be made and by whom, you can effectively solve arguments before they occur.

Examples of important decisions may include the hiring of senior level staff, whether to accept investment from third parties (and for what equity), diversification from the original core business, taking on external finance, share allocations etc.

For many start-ups, the protection of Intellectual Property (IP) is essential to the future success and security of the business, especially if the business is built around an original idea, a unique selling point or is breaking new ground in a particular industry.

Although IP may not have any monetary value whilst the business is in its infancy, it could potentially become your most valuable asset.

If a key shareholder chooses to leave the business, they may argue they are entitled to take particular parts of IP that they were involved in creating/developing with them, perhaps with the intention of starting their own similar company.

A Shareholders’ Agreement can decide how IP is to be divided or retained; in the event of a key person leaving the business, it can help mitigate the risk of a potential court case down the line.

Bear in mind that as your business grows and matures, you will need to review and update your Shareholders’ Agreement accordingly, especially is there are any significant changes in personnel or organisational structure. We highly recommend seeking professional legal advice when putting a Shareholders’ Agreement together.

Author: Christian Mancier, Partner in Corporate Law

Gorvins Solicitors

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered in this article, please speak to Gorvins Solicitors directly.

Published on 30th January 2018
(Last updated 21st March 2018)

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